Archives for November 2015

As discussed in previousposts, the supplement industry normally had to contend with the Food and Drug Administration (FDA) when releasing products. Several months ago, the New York Attorney General’s office conducted an investigation that found a number of supplements tested contained virtually none of the active ingredients that they claimed to possess. Note that these generally were not pre-workouts, fat-burners, or the kind of leading-edge supplements the FDA normally turns its attention toward: The products at issue were staples like vitamin C.

Now the Department of Justice (DOJ) has taken notice of these practices and put nutritional supplements, including two leading retailers–GNC and Vitamin Shoppe–in its crosshairs. Reuters carried the story:

Federal agencies including the Department of Justice will announce on Tuesday criminal and civil actions related to unlawful advertising and sale of dietary supplements.

[…]Representatives of GNC and Vitamin Shoppe were not immediately available for comment.

[…]

The DoJ said the news conference would be attended by representatives of the U.S. Food and Drug Administration, the U.S. Postal Inspection Service, the Federal Trade Commission, the Department of Defense and the U.S. Anti-Doping Agency.

More information will be forthcoming in the coming days. From my knowledge of how the DOJ prosecutes its defendants, especially criminally, I will make a few predictions and see how they fare:

• The DOJ has already filed its complaints (if civil) or indictments (if criminal) under seal. This allows them to begin the judicial process without the cases appearing on a public docket, and the parties potentially being alerted to suit. For companies such as GNC and Vitamin Shoppe that have the resources to monitor potential litigation against them, this is an important consideration.

• The involvement of so many different agencies seems to indicate that there will be a civil component to the case, with the threat of some potential criminal liability (always tacit when the DOJ is involved). The involvement of the FDA and Federal Trade Commission (FTC) seem to suggest a sprawling action that will span several agencies, and possibly encompass different lawsuits and administrative actions. The Postal Inspection Service also indicates the DOJ’s desire to find a hook to invoke federal jurisdiction: namely that the products at issue were being shipped over state lines and through the mail, allowing the issue to be removed from the purview of just one state with comparatively limited resources relative to the federal government.

• The FTC’s component of the dispute will potentially have the most consequences for the rest of the supplement industry. The FTC’s power is both vast and deep; the consequences of this case and any settlement GNC or Vitamin Shoppe enter could have reverberations for retailers and manufacturers alike. If the FTC’s component of the case is handled separately, Ken White’s prior commentary about the FTC’s consideration for due process may make the companies wish they were being pursued criminally.

• This is going to be costly for both companies, which have already seen stock prices dip on the news. Because the FTC only has civil authority, and no ability to bring criminal charges, its actions tend to be focused on seeking remedial conduct (i.e., stopping the bad behavior) and, most importantly, money. Example: When the FTC whacked Apple for $32.5 million based on in-app purchases made minors.

Previously, actions involving the supplement industry were staccato and tried to go after specific targets, such as USP Labs and Jack3d. Over the last few years, though, they have become more aggressive, both in terms of class actions over labeling, and increasingly bellicose warning letters from the FDA. This problem seems to be the supplement industry’s cross to bear: despite Walgreens and Walmart being fingered in the New York investigation, the latest news from the DOJ mentions only GNC and Vitamin Shoppe. Compared to Walmart, these may well be soft targets for the DOJ to impose its will.

First, six executives with USPlabs and S.K Laboratories (which allegedly manufactures products for USPlabs) were indicted, with four of them arrested and another two expected to surrender. (Source) This sounds consistent with the DOJ using sealed indictments to get its case in order, then unsealing them to arrest key individuals. I have not, however, been able to confirm this was the case.

Counter to Reuter’s initial report, discussed above, the DOJ’s announcement had nothing to do with GNC or Vitamin Shoppe. Their shares still were down, despite recovering somewhat, at the end of the trading day. (Source)

Finally, the DOJ and FTC both filed a host of civil lawsuits against companies, ranging from unfair trade practices claims to other causes of action. (Source) The Reuters article did not identify the specific districts where these actions are pending; this information may be available from PACER if the suits were not filed under seal, or have been unsealed.